Thursday, January 19, 2012

Caisse, CPPIB Still Buying Brazil's Boom?

Two of Canada's biggest pension funds said Wednesday they acquired a combined 49% stake in a shopping center in Rio de Janeiro for C$80 million, further bulking up their real estate holdings in Brazil.

Ivanhoe Cambridge, the real estate arm of Caisse de depot et placement du Quebec, and Toronto-based CPP Investment Board acquired the stake in Botafogo Praia Shopping center from Brookfield Brasil Shopping Centers, an arm of Brookfield Asset Management (BAM), an asset manager based in Toronto. They are each paying C$40 million towards the total price and as a result of the transaction, Invanhoe Cambridge and its Brazilian affiliate Ancar Ivanhoe Shopping Centers increased their position to 75.5% from 51%. CPP now owns a 24.5% stake in the shopping center.

Canadian pension funds have been active buyers of real estate holdings globally, attracted to the steady income these assets can generate to help them meet their payout obligations.

The Brazilian market is particularly attractive because of the relative strength of the country's economy, the resulting growing middle class and an under supply of high-quality institutional real estate, CPP says.

"Its fits very well" with the fund's objective of identifying real estate markets that "we think can outperform over...10-20 years," said Peter Ballon, CPP's head of real estate investments for the Americas.

The 166,824-square-foot Botafogo Praia Shopping center, located along Botafogo Beach in Rio, is comprised of 138 stores that benefit from the plaza's prime location and close promixity to public transit, the pension funds said.

The transaction is Ivanhoe Cambridge's first joint acquisition with CPP, but Ivanhoe Cambridge is already well established in the Brazilian market. With the latest deal, Ivanhoe Cambridge now owns 10 shopping centers across Brazil. Ivanhoe Cambridge's parent Caisse de depot oversees about C$151.7 billion in assets.

CPP, which has about C$152.3 billion under management, owns three retail properties, two office developments and eight industrial projects in Brazil.

In Brazil, CPP currently favors retail real estate because of the growing middle class. That group is expected to increase by an estimated 30 million over the next few years, or by the equivalent of Canada's population, Ballon noted.

CPP also likes the industrial real estate market in Brazil because of a shortage of buildings with the height, loading dock and heating requirements that international tenants and an increasing number of domestic tenants seek, he said.

Now we know who Michael Sabia was referring to when he said Canadian pension funds need to do more 'club deals'. However, as noted by the Montreal Gazette, Ivanhoe, through a Brazilian affiliate, already owned control of the center, so the Caisse’s interest is now 75.5 per cent and CPPIB’s 24.5 per cent.

Claude Sirois, senior vice-president of emerging markets for Ivanhoe Cambridge, said “the Brazilian retail sector is a strong focus for us and the latest deal confirms our long-term relationship with our affiliate Ancar Ivanhoe, with whom we now own 10 shopping centers across Brazil.”

Does it make sense to still invest in Brazil? There is no question the fundamentals are strong. In December, BBC reported that according to the Centre for Economics and Business Research (CEBR), Brazilian economy overtakes UK's:

The Centre for Economics and Business Research (CEBR) said its latest World Economic League Table showed Asian countries moving up and European countries falling back.

The CEBR also predicted that the UK economy would overtake France by 2016.

It also said the eurozone economy would shrink 0.6% in 2012 "if the euro problem is solved", or 2% if it is not.

CEBR chief executive Douglas McWilliams told BBC Radio 4's Today programme that Brazil overtaking the UK was part of a growing trend.

"I think it's part of the big economic change, where not only are we seeing a shift from the west to the east, but we're also seeing that countries that produce vital commodities - food and energy and things like that - are doing very well and they're gradually climbing up the economic league table," he said.

A report based on International Monetary Fund data published earlier this year also said the Brazilian economy would overtake the UK in 2011.

Brazil has a population of about 200 million, more than three times the population of the UK.

Brazil's economy grew by 7.5% last year, but the government has cut its growth forecast for 2011 to 3.5% after the economy ground to a halt in the third quarter, with analysts blaming the country's high interest rates and the worsening situation in the eurozone.

And although Brazil currently sells more to China than it imports, Brazilian manufacturers have complained that their industries are being affected by cheap mass-produced goods from the Asian giant.

The CEBR also said that Russia moved up one spot in its league table to ninth in 2011, and predicted that it would rise to fourth spot by 2020.

It predicted that India, the world's 10th biggest economy in 2011, would become the fifth largest by 2020.

And it said European countries would drop down the table, with Germany falling from fourth in 2011 to seventh in 2020, the UK from seventh to eighth, and France from fifth to ninth.

The deficit in Brazil's publicly-administered social security system should remain stable in 2012 after narrowing last year, but deficits in a separate system for public employees could balloon out of control unless reforms pass congress, the country's social security minister said Wednesday.

Brazil's social security ministry reported the deficit in the country's general program for non-government workers narrowed to 36.5 billion Brazilian reais ($20.5 billion) in 2011 from an inflation-adjusted BRL47.1 billion in 2010. The 2011 result was equivalent to 0.9% of gross domestic product, and was the best performance on record since 2002, when the country posted a deficit of only BRL30 billion.

At the same time, however, the deficit for the special system serving public employees widened to BRL56 billion from BRL51 billion in 2010. The ministry estimated that the deficit in the country's separate system for public workers will widen by an average of 10% per year, surpassing BRL61 billion in 2012 alone, if congress doesn't pass a reform bill currently under consideration.

"The country needs to create an awareness that the social security system can't continue in this manner," said Social Security Minister Garibaldi Alves after the release of the latest data.

Alves said the deficit in the general system covering non-government workers would likely remain stable in 2012 at its current level, as increased benefits related to a 14% hike in the country's minimum wage are offset by expected increases in revenues from a growing economy. Brazil's government is forecasting 2012 economic growth in a range of 4% to 5%, up from estimated 2011 growth of 3.2%.

Garibaldi said the proposed reform bill, which has been approved in a Chamber of Deputies committee, could see a vote on the floor of the lower house as early as March.

The bill under consideration would transfer all public workers contributions linked to salaries above BRL3,691 per month to a specially administered complementary pension fund, reducing some of the government's burden under a current pay-as-you-go system that is fully financed by public sector revenues.

Brazil's social security deficit has been a key contributor to the country's public sector nominal budget deficit, which stood at BRL98 billion, or 2.4% of gross domestic product, through the 12 months ending in November.

Brazil's central bank is scheduled to release 2011 public sector deficit and debt figures at the end of the month.

And it is worth noting that Brazil's fortunes are inextricably linked to China and some worry that its banks will suffer from eurozone contagion. Also worth noting is what Leo de Bever, President and CEO at AIMCo, said about Latin America in a recent Reuters article:

In emerging markets, said De Bever, deals are bubbling to the surface as struggling European banks back away from non-core projects.

He is now less keen, though, on Latin America, where AimCo struck a couple of big deals in the last couple of years, in power lines and toll highways.

Of course, along with other Canadian public pension funds, AIMCo invests in emerging markets, including direct investments in Brazil and Columbia, but as Brian Gibson, Senior VP, Public Equities at AIMCo, wrote in his white paper, investing in emerging markets "isn't what is used to be."

Below, Al Jazeera's Gabriel Elizondo reports on Brazil's economy. I also embedded a couple of reports exploring the Brazil-China connection. Finally, take the time to watch this BBC Newsnight report exploring whether Brazil's economic boom can last. It is fascinating, well worth watching, and you'll learn a lot about Brazil's booming economy and the challenges of poor infrastructure, bureaucracy, corruption, and restrictive labor laws.

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I am an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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